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The Real Reason Mortgage Rates Keep Falling

Mortgage Rates Continue To TumbleBy now mortgage rates were supposed to moving higher but that hasn’t been the case. Instead, lenders are elated to unload cash at rates which are beginning to approach the record lows seen in 2012.

The loser in all of this is the Federal Reserve. It raised rates in December and the nation’s banks instantly followed and increased the prime rate by .25 percent while at the same time refusing to raise the rates paid to depositors. Billions in new profits and executive bonuses could be created not because the banks were more efficient or more productive, but because the Fed was manipulating the marketplace in a way that would favor friends on Wall Street.

The Fed does not control mortgage rates, however, so home loans provide a real-world view of marketplace supply and demand. The week of the Fed announcement in December Freddie Mac reported that 30-year, fixed rate prime mortgages were priced at 3.97 percent, a rate which last week reached 3.58 percent.

Mortgage Rates & Excess Cash

Rates were near historic lows in December, they are lower today and they may become lower tomorrow. How do we know this? Because the banks are awash in cash. If Noah was a banker he would be building an ark right now.

The odds of mortgage rates quickly rising are just about zero. The odds of further mortgage rate declines are pretty good. The reason is that not enough people want what the banks are selling. Excess bank reserves went from $1.6 billion in March 2007 to $2.3 trillion in March 2016.

The banks would not have such hardy reserves if there was more loan demand. Rates would go up if the economy was expanding but despite all kinds of fuzzy numbers the grim reality is that for many Americans the economy has never recovered from the go-go mortgage market of the Bush years and its subsequent implosion.


If you wonder why so many people turn out for Trump and Sanders rallies just consider these numbers.

First, we’re not adding many full-time jobs to the marketplace. According to the well-regarded commentator, Mike “Mish” Shedlock, between 2010 and 2015 government figures show that 10,628,000 jobs were added to the economy. Of these 10,058,540 were something other than full-time. Instead, they are just pieces of the new gig economy. We’ve changed the definition of “job” to mean employment which is not full-time and where there are no benefits, no career path and no financial stability.

Second, the results of the new gig economy are obvious. According to the Census Bureau median household incomes have fallen 7.2 percent since 1999. Most of us are earning less than we did in the past while at the same time prices are rising, a situation encouraged by the Fed which thinks a 2 percent inflation goal is just dandy.

Third, don’t think for a minute that the investor class does not know what’s happening. Bill Gross with the Janus Capital Group, said in March that Bank of America shares had fallen from $50 a share in 2007 to $12; Goldman Sachs went from $250 to $146 during the same period and Deutsche Bank tumbled from $130 to $16.

Mortgage Rates & Home Values

We’re told that home values across the country have recovered because they appear higher than in 2007, the former peak period. In cash terms this is true but in terms of buying power it’s not. The typical existing home sold for $217,400 in March 2007 and $230,700 in January 2016. However, inflation – which the Fed is trying to encourage – has eaten away at our money. To buy what cost $217,400 in 2007 now costs $249,684 in today’s dollars.

The reason mortgage rates are low and are likely to fall further is that the erosion of the American economy is real and it’s concerning. As the great Pearl Bailey explained, “an empty stomach makes for open ears.” Is it any wonder that this year’s presidential nomination races are so contentious? A lot of people are looking for new answers because without an economy that creates wider benefits there will only be more and more empty stomachs.

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